Weekly S&P500 ChartStorm - 20 August 2023

This week: market seasonality, correction drivers, rates, stocks vs bonds, technicals, China macro, recession trading, profit margins, profitability, and the long-term earnings growth outlook...

Welcome to the latest Weekly S&P500 #ChartStorm!

Learnings and conclusions from this week’s charts:

• The market is running to its seasonal script of higher volatility into H2.

• Correction drivers of rising yields, tech reset, and energy resurgence are sitting at a key juncture and will be important to monitor for the next move.

• Stocks are extremely stretched vs bonds (relative performance).

• Markets are pricing in zero chance of recession.

• Long-term consensus earnings growth estimates are rising again after reaching an all-time low earlier this year.

Overall, there are some signs that the market is short-term oversold, but these are not particularly convincing yet, and the more logical base-building point for the index looks a little lower from here (~4300?). For a proper base or “buy-the-dip” point to form the original triggers of the correction need to calm, and they need to do so before the next shoe drops (China macro? CRE? Currency?).

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1. Season’s Greetings:  As mentioned previously, “seasonal patterns are well documented in the physical world, with reliable seasonal swings also seen in economic data and socio-behavioral trends. So it only makes sense that we also see seasonality in the markets”. And when it comes to the VIX, things are running right to the seasonal-script this year.

Source:  Chart Of The Day - VIX Seasonality

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2. Correction Drivers:  As the correction runs its course it’s worth monitoring what are arguably some of the key drivers (rising yields — TLT 0.00%↑, Big Tech boil-over — $NYFANG, and energy price resurgence — using the relative performance of XLK 0.00%↑ vs XLE 0.00%↑ as I think this captures the macro/market dynamics well). Arguably all are at a natural bouncing point, but equally if these things can’t find a base here and break lower, then it’s over.

Source:  @Callum_Thomas

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3. Rate Ructions:  Indeed, this chart captures it well, I featured a similar chart a few weeks ago which similarly had a question mark annotated on it, and well, it seems like we have an initial answer to that question… Higher for longer is bad for your health if you’re an overbought overhyped tech stock it seems.

Source:  @sstrazza

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4. Stocks vs Bonds:  As a continuation or different angle on the previous chart, this one shows just how sharp and stark the disconnect between stocks and bonds has become — thanks to the most catastrophic run of performance for treasuries in recent history, stocks have absolutely smashed bonds on a relative performance basis. But to pause and reflect, this chart does NOT look sustainable.

Source: @SoberLook via Daily Chartbook

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5. Technical Check:  As some indicators start to light up oversold the question arises as to where will be the initial stopping point in this correction — given where we closed on Friday I would say 4300 looks like the most natural point for the market to attempt to build a base. The 50-day moving average breadth indicator shows both how widespread the weakness has rapidly become, yet also how it is getting close to oversold levels (but stronger signal if it heads a bit lower (and then ticks up)).

Source: MarketCharts

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6. Next Shoe to Drop:  Aside from the tech/rates aspect, also lurking in the background is increasingly bad macro in China. Now eventually this may become a case of “bad news is good news” when/if China opts for large scale stimulus to avert a deflationary spiral, but I would say until then it’s probably going to be a case of bad news is bad news (at least for those actually paying attention).